Amendment 15

Part of Trade Bill - Report (Day 2) – in the House of Lords at 4:45 pm on 15 December 2020.

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Photo of Lord Hendy Lord Hendy Labour 4:45, 15 December 2020

My Lords, I am grateful to the noble Baroness, Lady Kramer, and my noble friend Lord Stevenson, for moving and speaking to Amendments 15 and 19, respectively. They significantly improve, but do not eliminate, ISDS. On that basis, I support them, since my assessment is that the elimination of ISDS is not currently politically feasible.

We now know a lot about ISDS, which is relatively common in international trade agreements. We know how objectionable it is and the chilling effect it can have. It is objectionable because it overrides the supremacy of Parliament, defeats the rule of domestic law—a concept familiar to all of us after recent debates—and discriminates on grounds of nationality. Far from taking back control and asserting British sovereignty, the current catchwords of government, ISDS surrenders both.

A couple of years ago, a petition against the inclusion of ISDS in the then-proposed EU-US trade deal, TTIP, attracted 3 million signatures—500,000 of them in the UK. The legitimacy of ISDS in EU agreements is now doubted by the Court of Justice of the European Union as well as by EU citizens. In Slovak Republic v Achmea, the court held that ISDS in the Netherlands-Slovakia trade agreement

“has an adverse effect on the autonomy of EU law” and is therefore incompatible with it. By like reasoning, ISDS in UK trade deals will adversely impact the autonomy of UK law.

ISDS is a mechanism whereby a corporation of one state party to the international trade agreement can bring a claim for compensation against the other state. It sounds fair, but it is not fair. ISDS claims bypass the courts of both state parties, and bypass the laws of both states. ISDS is a special privilege accorded only to foreign corporations, for use, in the case of the UK, against a democratic sovereign Government. ISDS is a right to claim compensation against the host state in which the corporation has made its investment—a right denied to the corporations and citizens of that state. That point is important and goes beyond the insult to sovereignty.

ISDS offends against the rule of law because a right and remedy against a host state is given to one class of putative claimant—foreign investment corporations—and denied to all the citizens, companies, co-operatives, trade unions and other organisations in the host state. ISDS offends against the rule of law, whereby that right and remedy is exempt from the courts and the legal system of the host country. It offends the principle of non-discrimination because that right and remedy is only available to non-nationals of the host state.

An ISDS claim is never that the host state has breached the law of the land. Indeed, it is invariably the converse: that a provision of domestic law has caused the foreign corporation loss of hoped-for profits. I refer again to the Philip Morris case as an exemplar, much cited in Committee. The Australian parliament passed legislation requiring plain-paper packaging for cigarettes. It was a democratic decision of a sovereign parliament. Philip Morris challenged the legislation in the Australian courts. It failed at every level, up to and including the High Court of Australia. Philip Morris then transferred ownership of its Australian companies to a subsidiary that it had set up in Hong Kong to enable an ISDS claim under the Australia-Hong Kong trade agreement. That claim ultimately failed but only because the transfer of ownership of the companies to Hong Kong post-dated the legislation giving rise to the claim.

Successful or not, ISDS claims can override the sovereignty of a parliament and domestic law by the chilling effect of the size of the compensation sought and often awarded. These amounts can be so large that even wealthy states shudder. The UN Conference on Trade and Development monitors international trade agreements and ISDS claims and awards. Although most ISDS proceedings are secret, of 1,023 known claims, UNCTAD has provided detail on 710. Your Lordships should know that no less than 104 of them—nearly 15%—were claims in excess of US $1 billion. In Committee, I gave an array of examples of multi-billion dollar claims and multi-billion dollar awards. I will not weary your Lordships by repeating them; they are set out in Hansard for 6 October. I am grateful for the generous comments of the noble Baroness, Lady Bennett, and the noble Earl, Lord Caithness, for their endorsement of some of the points I made then.

It is sometimes asserted that ISDS is necessary to allow the corporations of developed states to avoid having to litigate in the corrupt or ill-administered courts of developing countries. However, UNCTAD’s analysis undermines that justification. As the noble Lord, Lord Lansley, indicated, corporations have brought multiple claims against the USA, Canada, Australia, Germany and other states with well-developed legal systems, which have been bypassed in favour of using the special privilege of ISDS. The UK, under the wing of the EU, has so far been sheltered, but in future it will not be immune. For example, the UK seeks a trade deal with the USA. US corporations, as the noble Lord pointed out, have been frequent users of ISDS. We know that corporations have been establishing subsidiaries in other countries to facilitate possible claims against the UK.

The nature of ISDS claims is well established. The usual basis is that the accused state has failed to ensure fair and equitable treatment or has expropriated some asset of the investing corporation. Reported cases, such as that involving Phillip Morris, show how ISDS claims threaten Governments that exercise their democratic mandate to do such things as phase out nuclear power, renationalise a metro, exclude mining from national parks, limit pharmaceutical charges and so on. A future UK Government seeking to renationalise domestic power, water or railways, or, for example, to bring the disastrous and exorbitant track and trace regime into NHS ownership, could be at risk of ISDS. Such policies are controversial, but those who oppose them should defeat them at the ballot box—as, indeed, they have done so far—rather than by legitimating the offensive machinery of ISDS.

Nor should we support ISDS for use by UK corporations against other states. The ISDS challenge to our state cannot be justified by permitting similar challenges to other states. In any event, when UK corporations make investments overseas, they evaluate the risk that things could go wrong or that the state might change the law. That is a matter for them. Why should we risk our democratic decision-making to give UK commercial investors overseas a special legal privilege?

Finally, I note the benefits of the proposal for a multinational investment court in place of secret arbitration under ISDS. Transparency instead of secrecy and a fixed body of professional judges in place of ad hoc arbitrators, drawn often from those who conduct ISDS cases, are improvements. However, the central evil of ISDS is not resolved. ISDS before a panel of judges still remains an assault on the rule of law, parliamentary sovereignty and the principle of non-discrimination.